New Tax Bill Saves Popular Tax Breaks

By overwhelming margins in both federal chambers, the House and Senate approved the Working Families Tax Relief Act of 2004 (the Act). The Act doesn't blaze any new trails, but, instead extends the expiration of numerous tax provisions. A host of technical corrections were thrown in for good measure. The major individual provisions of the Act are highlighted below. See the related article on page two for information on the business provisions of the Act.

Standard Deduction on a Joint Return. The standard deduction for a married couple filing a joint return in 2005 was scheduled to drop to 174% of the deduction for a single taxpayer (from 200% in 2004) before rising back to 200% in 2009. The Act raises the standard deduction on a joint return in 2005 through 2008 to twice that on a single return. Thus, the estimated standard deduction for a 2005 joint return is $10,000.

AMT Exemption. The 2004 alternative minimum tax (AMT) exemption amounts of $58,000 (joint), $40,250 (single), and $29,000 (married filing separately) were scheduled to drop to $45,000, $33,750, and $22,500, respectively, in 2005. The Act retains the higher 2004 amounts for 2005.

10% Tax Rate Bracket. For 2004, the 10% tax bracket applies to the first $7,150 of taxable income for single taxpayers and the first $14,300 of taxable income on a joint return. For 2005 through 2007, the upper end of the 10% bracket was scheduled to drop to $6,000 (single) and $12,000 (joint) before increasing to $7,000 and $14,000 in 2008 (adjusted for inflation after 2008). The Act resets the size of the 10% bracket for 2005 through 2010 at the 2003 level ($7,000 for single individuals, $10,000 for heads of households, and $14,000 for married individuals filing a joint return) with annual indexing after 2003. Thus, for 2005, the end of the 10% bracket is projected to be $7,300 for singles, $10,450 for heads of households, and $14,600 for joint returns.

15% Tax Rate Bracket. The 15% tax bracket on a joint return was scheduled to fall to 180% of that of a single taxpayer in 2005 (from 200% in 2004) before rising back to 200% in 2008. The Act increases the size of the 15% bracket to twice that on a single return for 2005 through 2007. Thus, the end of the 15% bracket in 2005 is projected to be $59,400 on a joint return and $29,700 on a single return and married filing separate return.

Child Tax Credit. For 2004, an individual may claim up to a $1,000 tax credit for each qualifying child under age 17 at the end of the year. The maximum credit was scheduled to drop to $700 for 2005 and eventually increase back to $1,000 by 2010. The Act increases the child credit to $1,000 for 2005 through 2009. The Act also accelerates to 2004 the increase in refundability of the child credit to 15% (up from 10% now) of the taxpayer's taxable earned income in excess of $10,750 (including combat pay).